Ethiopia’s bond market is at a turning point as authorities prepare to introduce a new secondary trading platform.
This disruption comes as the government-dominated primary bond issuance market transitions in tandem with the launch of the country’s nascent stock exchange.
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According to officials at the Ethiopian Capital Market Authority (ECMA), developing the bond market is a key part of their broader efforts to transform Ethiopia’s financial system. With the stock market debut imminent, bonds will join equities as one of the new investment instruments available.
Recognizing the bond market reforms as integral to the exchange’s success, ECMA opted not to go alone. The complexity of designing bond products, evaluating stakeholders, and crafting appropriate regulations demanded external expertise.
To this end, ECMA has this week partnered with the International Finance Corporation (IFC), the World Bank’s investment arm. This alliance will help ECMA deliver on its goal of establishing a robust local currency bond market with seamless secondary trading, its officials said.
At the signing ceremony last week, leaders from both organizations pledged their commitment. In attendance were ECMA director general Brook Taye (PhD), governor of National Bank of Ethiopia (NBE) and ECMA board chairman Mamo Mihretu, as well as IFC’s regional management.
Over the next four years, the Ethiopia Capital Market Development Project will see IFC and ECMA collaborate closely on four work streams central to reforming the bond market, which the Director General described as “a crucial step towards strengthening the capital market.”
As Brook explained, they involve; establishment of the secondary bond market, drafting new legal frameworks, evaluating key players, and demonstrations.
Through the deliverables, ECMA and IFC aim to jointly transition the existing government-dominated bond market toward a more private sector inclusive structure that, as Brook stated, is “fundamental to the overall health of the financial system.”
In the first stage, a thorough study and establishment of the bond market that is considerate of the secondary market in local currency will take place. With support from IFC, the ECMA team will design the framework for the bond market on the upcoming stock exchange.
Currently, there is an existing bond market but only at the primary level, with treasury bills issued by the NBE and purchased by the Ministry of Finance through 28, 91, 182, and 364-day maturities. Previously, there was no option to sell the bonds before their maturity dates.
“The establishing bond market will enable liquidation of bonds for listed market players through the secondary market at any time,” Brook said.
As part of the review of the legal framework regarding the bond market, the project team will prepare a detailed document outlining the laws and regulations that must be in place as well as the obligations of state-owned businesses, municipalities, individuals, and corporations expected to dominate the bond market.
The second support area will involve evaluating bond worthiness, screening corporate structures of issuers, and adapting a culture for Ethiopia’s secondary bond market. Evaluation indicators could include environmental, governance, corporate, and social issues, according to the Director General.
As part of the third core deliverable, the two institutions will work to identify the investor base. Drawing on its diverse market experience, IFC will study the investor base in Ethiopia, identify interests in product types, and ensure flawless bond market accessibility for all, as Brook briefed to The Reporter.
“Both bond issuers and investors will have to adhere to strict requirements essential to maintaining a sound secondary market ecosystem,” he said.
One of the key areas and the fourth focus of the partnership will be active participation in the bond market as part of demonstration efforts.
After designing the market, establishing standards and legal frameworks for market participants, and identifying investors, IFC will take the last steps to kick off the secondary market by conducting demonstrative transactions.
“Part of the support will include IFC itself becoming an anchor investor by purchasing bonds as a demonstrative transaction,” he said. “They have also invested in bonds of other countries.”
If bond issuers face short of finance to hire crucial players like investment banks and underwriters at the final stage, the partnership will fill the gap by providing a support mechanism.
The partnership process had been going back and forth for around a year, delayed because the director general position was not filled. Following Brook’s appointment as head of the Authority, the process was expedited; initially planned to finalize in July, it was extended to the September kickoff.
For the Director General, bond market launch won’t take the full four years of the project timeframe. While bond market study will proceed only until the third quarter of next year, onboarding consultants for developing legal frameworks will take place simultaneously, as he planned.
“The four-year period is an excessive timeframe. We will finalize it within one year, especially studying the investor base, identifying the local currency market, and preparing the legal framework to move to demonstration transactions,” he said.
Refraining from disclosing the value of support, Authority heads said to be receiving funding valued at a “significant amount” sufficient to realize the inclusive bond market.